Big Tech Is Too Expensive? Don’t Believe It, Says Cooperman

To Wall Street giant Leon Cooperman, investors should snap up mega-cap tech stocks, undeterred by their towering multiples. They may look expensive, but they’re really affordable. Why? Because they’ll get a lot more expensive in the future—and they have big futures.

The billionaire investor contended that his take on multiples is solid because today’s low bond yields won’t stay that way. And, he suggested, that will have an impact on earnings, which will inflate those ratios.

“When you look at Google, when you look at Facebook, you look at Microsoft, you look at Amazon,” he told CNBC, “if you believe the economy is going to grow and interest rates are going to say where they are, they’re not overvalued.” Bonds, however, are “totally mispriced” and “overvalued.” At some point, as the economy grows and Big Tech’s place in it improves even more than it has lately, bonds “will make a good short,” as their prices will plunge while their yields ascend.

Once that happens, today’s lofty price/earnings (P/E) ratios will go up still more, his rationale runs. The four companies he mentioned—whose stocks his family office owns—are nobody’s idea of value investments. Google-parent Alphabet (the office’s largest holding of the quartet) has a multiple of 34.9; Facebook is at 29.3; Microsoft, 38.1; and Amazon, 68.

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At the moment, interest rates are stunted, by historical standards. The federal funds rate, which influences short-maturity debt, is near zero, and some Federal Reserve officials have talked about possibly raising it starting next year. The yield on the 10-year Treasury, the benchmark for longer-dated paper, sits at 1.2%. Should the Fed trim its robust bond-buying program, that yield should climb.

Cooperman has a glowing view of tech’s future, and especially of the large names he owns. Of Alphabet, he remarked, “The people that run that are a hell of a lot smarter than me. They keep me covered in technology.”

Growth stocks, and the tech leaders in particular, don’t benefit from higher rates, partly because of the higher costs of borrowing that produces. The main problem, though, is that higher rates affect the discounting of future cash flows. In other words, they crimp expected earnings. That in turn would tend to escalate P/Es, as the denominator in that ratio ends up smaller.

As the result of higher anticipated interest rates, and the downward pressure that puts on fixed-income prices, Cooperman stressed that bonds should be avoided. “It’s like looking at a rattlesnake—you see him curled up in the corner, and you give it a kick to see if it’s alive,” he said. “I think the smart thing to do is just stay away from it. I don’t want to own any bonds.”

Cooperman is not put off by occasional stock market slumps, like Monday’s. In his view, “the conditions for a bear market are just not present.” During the market’s turbulent past year, he has had doubts about equities, but never forsook them. He warned last fall that the tech titans risked ending up like the Nifty Fifty must-have stocks of the mid-20th century. Nevertheless, he maintained sizable positions in Big Tech.

Cooperman, who built up Goldman Sachs’ asset management division over a quarter century, departed in 1991 to launch his own hedge fund firm, Omega Advisors. This operation had a very successful run before he closed it in 2018, converting the firm into his family office.

The Federal Deficit Is a Forgotten Menace, Cooperman Says

Welcome Big Tech Back to the Head of the Class

Tags: Bonds, FAANG, growth stocks, Leon Cooperman, tech stocks

Due to the rare combination of rising equity markets and interest rates, corporate defined benefit (DB) pension plans saw such a large boost in funded status over the past year that they should consider pivoting to a hibernation portfolio as part of a de-risking strategy, says a report from NISA Investment Advisor.

According to NISA, the average corporate pension plan’s funded status surged from 85% as of March 31, 2020 to 95% just one year later, which it said has spurred many plans to take de-risking steps over the past six months. It also said that the rebound during this period for both interest rates and equity markets has led to the strongest funded status since just before the global financial crisis.

Hibernating risks closes a plan to new entrants and stops accruals for participants in order to limit financial risks, while allowing the plan sponsor to continue managing the plan. Although this protects against the risk of benefit increases, plans are still exposed to many other risks, especially interest rate risk.

“Increased funded status, newly legislated funding relief, and historical contribution credit balances have created clearer skies and calmer waters for plan sponsors,” NISA CEO David Eichhorn said in a statement. “Plans that are nearly fully funded or overfunded should consider accelerating their de-risking decisions to protect this elevated funded status and limit the potential for future contributions.”

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Plan sponsors considering hibernation strategies are typically seeking relatively low pension risk exposure, and a plan in hibernation will typically be invested heavily in fixed income. The report said the funded status improvement combined with relief provided by the American Rescue Plan Act (which increased the period during which contributions are intended to reduce funding deficits to 15 years from seven years), and the large credit balances among plans has led to “drastic reductions” in expected future contributions for the average plan.

“So much so that we believe there is a strong argument to accelerate the de-risking moves dictated by one’s glide path,” said the report. “In particular, for plans that are greater than 95% funded, we see a compelling case to move to a hibernation portfolio—now.”

According to the report’s findings, there is a less than 5% chance that contributions will exceed 0.5% over the next five years for a 95% funded plan in hibernation; and a plan that is 5% underfunded today could hibernate immediately and have only a 5% chance of contributing more than 2% over the next 10 years.

“This is as strong of an incentive to hibernate as it is a disincentive to contribute,” said the report.

The report also compares a hibernation strategy to remaining on a glide path or a static allocation of 30% equity, 70% fixed income. It found that “both the glide path and the 30/70 strategies provide very little, if any, advantage over an early hibernation plan,” adding that in the more extreme outcomes “they perform appreciably worse.”